Mutual Funds are an integral part of the financial system that provides the benefits of a diversified portfolio and expert fund management to a large number of small investors. Now, looking back a few years ago, there were only two basic categories of mutual funds – growth funds which owned mostly stocks and income funds, which owned mostly bonds. But then, over a period of time, came along a plethora of categories like balanced funds, index funds, short term bond funds, etc, thus leaving the investors in a state of confusion to opt for, the most suitable mutual fund from the extensive option of investment avenues.

Therefore, the best way to solve the puzzle is to integrate the basic principles of investing while devising the investment strategy, as it is aptly quoted that the optimum way of wealth creation & preservation would be through disciplined, regular, consistent and long term investment approach.

Thus, the primary imperative step in building a well-diversified investment portfolio is deciding how to divide one’s money among various asset classes – popularly known as Asset Allocation Process. The asset allocation strategy is an important factor for influencing the return and the risk of an investment portfolio and it is not a onetime decision—it is a process. As an investor’s time horizon, return and risk tolerance capacity would undergo continual changes, the composition of the portfolio would also need to undergo transformation.

Establishing an asset allocation strategy and rebalancing regularly to preserve the same would lead to a more disciplined investment approach.

Thus, keeping in mind the vast choice of investment arena in the equity space, the asset allocation strategy could even be incorporated within the equity asset class. The equity mutual funds can further be sub-divided into various categories like diversified large cap, mid cap, multi cap, balanced & others.

Also, the risk profile of the investor would change based on his age. Thus, for an investor between the age of 45 – 60 years, his investment decisions would be relatively risk – averse as compared to a young investor between the age of 20 – 35 years.

Hence, in order to map the proposed allocation of funds in different categories with the investor’s risk profile, an asset allocation model has been formulated for all type of investors.

The below mentioned model is based on age – investment principle, which recommends that the portion of relatively less risky asset class of an investor’s portfolio should be equal to his age and the balance should be invested in relatively more risky asset class. For example, a 30 year old investor should invest 30% in relatively less risky asset class and 70% in relatively more risky asset class.

Categories Risk Profile

The above mentioned asset allocation model has been derived using established theories on risk and return. The asset allocation model is purely indicative and notional. The allocation has been restricted only to the equity portion of any given portfolio. Readers are advised to seek appropriate independent professional advice and arrive at an informed investment decision before making any investments.

For understanding the fund allocation for tax saver category, the same has been included under multi – cap category. However, allocation towards tax saver funds can also be mapped with ones’ tax saving needs.